Current State of Real Estate

Recently I have begun to dip my toes into the waters of real estate. I have tried to tame my urge to buy a beautiful home for my family to live in - But, I am slowly getting tempted. Why? Well a few reasons. Our place is horribly small, 920 sq. ft. We are outgrowing this place with more and more crap. And ideally, I want to work on a house, giving me projects to do over the weekend.

So, I began talking to a real estate agent, and I started hearing the same lame excuses as why it is a good time to buy - Real estate is lower than it's been in a long time, renting is just throwing money away, interest rates are lower than they've ever been, etc, etc... So, I started realizing what is going on in the real estate industry - and it is now time NOT TO BUY.

Here is what I see as problems and forecast for this.

#1: Interest rates are lower than they've ever been: Okay, this may be true. But, here is the truth of this. Affordability has increased due to the decrease in interest rates. What does that mean? Well, a home that is normally 200,000 at 10% has a payment of 1755.14 for 30 years. Now, when interest rates decrease to 5%, the payment then goes to 1073.64 making for an apparent 39% increase in affordability. These numbers are obviously not accurate, but for the simplicity of it, take it as a roundabout truth. With this, "fact", then more people can afford a home causing an increase in the demand side of home prices. The supply side must then reduce, causing a price increase. Therefore, with a reduction in interest rates, prices will rise... THIS HAS NOT HAPPENED: Prices have been reduced because of alot of varying factors. #1, personal credit has been shot. #2, the economy has shrunk causing real incomes to reduce, causing deflationary pressure on all prices #3, over building has caused increase inventory which has increased the supply side #4, the lowering of asset values has left people to walk away, thus increasing the supply side #5, foreclosures, etc increase supply side.

Sure, demand is rising, but not enough to keep up with the supply side. Moreover, with interest rates lowering, the prices should be rising, so effectively, there is a "real" reduction in home values more than what would be seen if interest rates have risen or stayed the same.


So, what is going to happen? The problem also lies in the fact that inventory
has been bought up, and speculators are coming out buying thinking it's a great time to buy - causing artificial demand. On top of that, we've had a moratorium on foreclosures, giving the false sense of inventory levels decreasing and an end to the real estate mess. So, where are we now? Now that the moratorium is over, we will see a rise in inventory levels. That will further depress prices, causing some to walk away from their homes if they lose value. The economy has yet to see it's bottom, and that may take another hit on people who have just bought a house believing their jobs were stable, and they aren't.

With interest rates being at historical lows, there is only one way up. With the government increasing it's debt size, the interest rates are going to rise due to default risk. Inflation is a thing of the past as there is not enough money chasing the number of goods produced, depsite the governments best efforts. (Think about this: how many trillions of dollars have been lost in the stock market from March of 2007 to the present? Now, think about the paper losses of real estate that have happened from 2005 to present - Next, think about how much the government is spending to help "revive" the economy? Yeah, it doesn't come close to what was lost). So, with the fact that interest rates are going to go up, that will cause prices to further be depressed. Many other factors are inclusive of this, but I am trying to keep it as simple as possible.

Now, let's think about down payment. On that $200,000 house at 5%, you'll need 3% for FHA or 20% for conventional. So, $6,000 or $40,000. Let's go back to our 5% rate 10% rate example. If interest rates double, let's assume real estate drops 39%, as evident by the decrease in payment. That then brings that 200,000 home down to 122,000. If you wait, your downpayment is now 5% or 33%. Your payment at 122,000 at 10% is the same as it would be at 200,000 at 5%, difference being that you now owe less...

So, anyone thinking it's a great time to buy a home - Wait it out... The recover won't be a V, nor a U - It'll more than likely be an L - And that is my prediction on real estate... We are a long way from the bottom.

:::Disclaimer:::

Greetings out there to all who are reading this. I am starting this new blog on blogspot because I like the format and the layout of it. Not just that, but because of search engine crawlers, it will be able to pick this site up, and hopefully get it publicized better than that of myspace - Plus, I hardly use that at all. Not just that, but it is much easier and user friendly. As a disclosure, I have not read those postings for years - I merely copy and pasted them into this blog. Therefore, I apologize if I offend anyone with my transparent language. I tend to speak my mind and the truth and sometimes fail to realize that it may offend people. So, if you have a problem, I will be more than happy to change it. I know I once posted on myspace a specific name of a financial advisor that I thought of as a douche because he lied to his customers merely to make his commission - I subsequently removed his name.

I have in the past 15-20 minutes transcribed all of my pertenant postings from myspace to help you understand that I am not new to this. I have been following the economy quite closely since 2002ish, and following the equity markets since 1998. The previous postings are written from an unbiased approach to the markets, as I have no financial interest in anything I speak of, and if I do, I explain what my interest is. I am not a cheerleader, and the underlying fundamental for myself is that there are certain times to buy assets and certain times to sell. I have been a stock broker for the past 4 years, been in the stock market since 1996 with my first mutual fund - actively traded stocks, mutual funds, options, and commodity ETF's since 2005. I have my undergrad in business finance and minor in economics. But, the basis among my rants is that I speak the honest truth as to how I see it.

I don't care about making money - If I want money, I will go get another job to get more. I am not motivated by money. I have cheap taste, my dream car being a Jeep Wrangler - which I have. I've always wanted a cruiser motorcycle - which I now have. I've always wanted an amazing wife - I have this now. I've always wanted a great daughter - I have that too. What does all this mean? I am not looking to grow my possessions, as that doesn't make a person. So, my rants, posts, blogs, whatever you want to call it - They all stem from an unbiased approach and look on the markets.

With that, I move to my first real post of this blog - the others are all from myspace that have been written over the past few years.